What is Bankruptcy about?
The discharge and automatic stay
The most important effect of filing for bankruptcy is the automatic stay. The automatic stay goes into effect when a bankruptcy case is filed. However, if you had a bankruptcy dismissed within one year prior to filing, the automatic stay is in effect for only 30 days. In these cases, you would have to file a motion to extend the automatic stay. When the automatic stay is in effect, almost all creditor actions are stopped: the mortgage company can’t continue with a foreclosure, the creditor attorney must stop and release a garnishment, a lawsuit cannot continue.
At the end of the bankruptcy, the court will issue a discharge order which wipes out the debtor’s debt. Clients sometimes ask who pays the debt? No one, it is the cost of doing business. I some situations, the creditor already recouped the loan amount through interest and late fees.
Chapter 7 discharge
The general rule is that any debt that was incurred prior to filing bankruptcy will be discharged (wiped out). §727 of the United State Code (U.S.C.) lists 12 exceptions from discharge, such as the debtor is not an idividual, committed fraud, or received already a discharge without waiting the required time for a new discharge.
Sometimes, clients receive the discharge order and think their case is finished and they do not need to anything anymore. But if the trustee for example has questions or is asking the debtor to turn over assets or documents, the debtor still needs to comply with the trustee’s request. The discharge can be revoked if a debtor does not cooperate with the trustee or judge.
First, the trustee would file a motion to comply with the trustee’s request and the court would enter an order. The request is most often to turn over a copy of the tax return or pay a portion of the tax refund to the trustee. If the debtor does not comply with that court order, the trustee might file a motion to revoke the debtor’s discharge.
The discharged can also be revoked if it turns out later that the debtor concealed property and committed fraud. If you transferred any property before filing of your bankruptcy case, the Statement of Financial Affairs requires you to list all transfers. If a transfer of property of high value was not listed, and the court finds out about it later, a judge most likely will not buy the argument that you forgot to list the property or transfer. With signing the schedules and statements of the bankruptcy petition, you swear under the penalty of perjury that the information is complete and correct.
We see however, the opposite situation much more often that clients do forget to list a transfer or a creditor and have a sleepless night about it. It does make a difference if you transferred you old car with a value of $500 to your best friend two years ago, or if you just “forget” to list your yacht with a value of $40,000 that is sitting in you backyard. If you are hones and don’t try to hide anything, there is no reason to lose sleep over it, you can amend your petition and add the information.
Waiving the discharge
§727(a)10 U.S.C. allows the debtor to waive the discharge. This provision is almost never used by the debtor because the discharge is the relief the debtor wants and the reason the bankruptcy case was filed in the first place.
However, there are situations in which the option to waive the discharge might be important. Only if the debt was incurred before filing of the case, it can be discharged. And keep in mind, that the debtor won’t receive another discharge for eight years in a chapter 7 (the waiting time is different for a chapter 13). If the debtor incurred for example extremely high medical bills after filing of the bankruptcy case, he most likely would want to include these bills in his bankruptcy case. Normally, the debtor just could dismiss the case and re-file. However, if the bankruptcy case is an asset case, that means the debtor has un-exempt equity (perhaps from a tax refund that is not fully exempt), that needs to be turned over to the trustee, the debtor most likely will not be able to dismiss his case. The trustee would object to a motion to dismiss.
In these cases, the debtor would have to go through with his chapter 7 bankruptcy case and might consider to waive his right to a discharge. The waiver must be approved by the court to be effective.
Discharge in a Chapter 13 Bankruptcy case
In a chapter 13, the debtor receives a discharge of his debt at the end of the chapter 13 plan, not at the beginning when the plan is confirmed by the court. If the plan does not complete and is being dismissed before the court grants the discharge, the debt is still owed, minus the payments that have been made through the chapter 13 plan.
The discharge, a debtor receives in a chapter 13, is broader than in a chapter 7. Often, clients don’t want to do a chapter 13 and rather would file a chapter 7 bankruptcy case, however, chapter 13 has some advantages over chapter 7. One of it is the broader scope of the discharge.
One of the differences that plays a role in a chapter 13 is that §1328 U.S.C. does not refer to §523(a)(15) which excludes the discharge in a chapter 7 for debt incurred in the course of a divorce. That means, debt incurred in the course of a divorce in not dischargeable in a chapter 7 bankruptcy, but it is in a chapter 13. However, the section does refer to domestic support obligations which are also not dischargeable in a chapter 13.
Other benefit of chapter 13
Other benefits of filing a chapter 13 include being able to stop a foreclosure and repaying the arrearage over a period set by the bankruptcy court. In the Eastern District of Missouri (that is the St. Louis Missouri area), the court allows the debtor to pay any arrearage on their mortgage over a 48 months period. Most districts allow debtors to repay the late payments over the length of the plan up to 60 months.
Another benefit is that the chapter 13 allows a debtor to repay non dischargeable tax obligations without incurring post-petition interest.
Debtors are also able to “cram-down” in a chapter 13. That means they are required to pay only the value of the property that is secured for a loan. For cars for example, the car needs to be purchased more than 2.5 years before filing of the bankruptcy case in order to cram down. If the car was purchased within the last 2.5 years before filing, the debtor would have to pay the full loan amount.